Q1 2023 Olympic Steel Inc Earnings Call
Good morning, and welcome to your Olympic Steel 2023 first quarter financial results Conference call.
At this time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I would like to hand, the conference over to Rich Manson Chief Financial Officer and Olympic Steel. Please go ahead Sir.
Thank you operator, welcome to Olympic Steel's earnings call for the first quarter of 2023, our call. This morning will be hosted by our Chief Executive Officer, Rick Mirabito and we will also be joined by our President and Chief operating Officer, Andrew Greiff.
Before we begin I have a few reminders. Some statements made on today's call will be predictive and are intended to be made as forward looking within the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 and May not reflect actual results.
The company does not undertake to update such statements changes in assumptions or changes in other factors affecting such forward looking statements.
Important assumptions risks uncertainties and other factors that could cause actual results to differ materially are set forth in the Companys reports on forms 10-K, and 10-Q and the press releases filed with the Securities and Exchange Commission.
During today's discussion we may refer to adjusted net income per diluted share EBITDA and adjusted EBITDA, which are all non-GAAP financial measures a reconciliation.
<unk> of these non-GAAP measures to the most directly comparable GAAP financial measures is provided in the press release that was issued last night and can be found on our website.
Today's live broadcast will be archived and available for replay on Olympic steels website.
At this time I'll turn the call over to Rick.
Thank you rich and good morning, everyone. Thank you for joining us on today's conference call to discuss Olympic Steel's 2023 first quarter results.
I'll begin with an overview of another strong quarter for Olympic steel.
Driven by our ongoing strategy to diversify and strengthen our company.
And then Andrew will review highlights from each segment and provide some comments on market conditions.
Knowing that rich will discuss our financial results in more detail and then as always we'll open up the call for your questions.
Our year is off to a strong start for the first quarter Olympic steel reported sales of $573 million and adjusted EBITDA of $28 $6 million with balanced earnings from all three of our segments.
Overall customer demand remained steady with metal distribution shipments, increasing 3% from a year ago and significantly increasing 15% from the seasonally slower fourth quarter.
And as we mentioned on our last call after six or so of declining steel prices. We began to see price increases in December of last year and these supply driven increases accelerated as we entered 2023 at the end of the first quarter Hot rolled index pricing was up 74% from the <unk>.
Beginning of the year.
Our acquisition of metal Fab in January was a highlight for the quarter.
As the second largest acquisition in our history and our sixth acquisition in the last five years metal fab represents the latest success in our strategy to diversify and strengthen Olympic steel.
As youll recall metal fab broadens, our product offerings capabilities and geographic reach by producing venting and filtration products for residential commercial and industrial application.
Products are manufactured primarily of coated carbon and stainless steel and aluminum and our two Wichita, Kansas facilities.
Included in our carbon segment, we're thrilled with the fast start and the performance of metal fab as.
As rich will highlight later the impact of one time acquisition expenses and purchase accounting adjustments are now behind us in the first quarter and we will see the benefit of metal Fabs earnings in the second quarter of 2023, followed by meaningful synergies beginning in the second half of the year.
While successfully integrating metal fab is a priority for our team Olympic steel remains extremely well positioned to identify and pursue additional acquisition opportunities that advance our strategy.
Our balance sheet is incredibly strong and with the increase in our revolving credit line executed in conjunction with the metal fab deal. We now have record levels of capital and borrowing availability to invest in organic growth initiatives automation and further acquisitions that align with our strategic pre.
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We're excited about the future of Olympic steel and the prospects to build our business model for sustainable long term success.
We also recently issued our second corporate responsibility report, which can be accessed on our website. The report highlights our progress in ESG dei safety and our other core value initiatives at Olympic steel.
As we look ahead, we understand that the near term macroeconomic picture is unsettled.
However demand from our industrial Oems remained steady and we expect the second quarter to look a lot like our first quarter.
We have demonstrated that our team's actions to diversify and grow Olympic steel have made us a stronger more resilient and consistent performer, while navigating the impacts of market cyclicality. So now with that I will turn the call over to Andrew.
Thank you Rick and good morning, everyone as Rick noted the first quarter was a strong start to the year with solid and steady performance from each of our segments now for a look at our performance by segment, starting with carbon the favorable combination of increased shipment volume and improving pricing environment.
And the addition of metal fab delivered a strong quarter.
Although results were adversely affected by onetime charges associated with the acquisition carbon contributed adjusted EBITDA of $11 $6 million for the quarter.
<unk> hard work and discipline around inventory management enabled the segment to positively impact our results as our shipments rose 6% from a year ago, which does not include metal fab as we do not report tons sold for this business congratulations to David and the entire carbon segment on their.
Handing work in performance this quarter.
Pipe and tube led by Bill Zielinski had its second most profitable quarter ever contributing EBITDA of $11 $3 million.
The team's focus on margin improvement and fabricated product growth is driving positive results.
In particular, the investments to improve the segment's fabrication capabilities are leading to enhanced laser speeds reduced lead times and improve service to customers.
We are also targeting a may ground breaking for our 30000 square foot des Moines, Iowa expansion.
With expectations to be operational by the end of the year.
Specialty metals led by Andy Markowitz faced industry wide stainless steel headwinds leading to softer volumes and lower margins. The good news is we are still able to post another very profitable quarter, earning EBITDA of $10 $2 million.
We continue to organically grow in aluminum as our share of the market rose to a two year high following the divestiture of our Detroit operation in September of 2021.
Our new white metals fabrication facility in Bartlett, Illinois is near completion, and we expect it will be fully operational in the second quarter.
Overall, we expect second quarter demand to remain steady similar to the first quarter, our industrial Oems continued to show a solid backlog and are performing to forecast we.
We are seeing a pickup in our food equipment and appliance segments truck trailer customers and transplant automotive business in the southeast. Thank.
Thank you to our entire team for another outstanding quarter, now I will turn the call over to rich.
Thank you Andrew and good morning, everyone. It was an exciting quarter for Olympic steel highlighted by strong performances in all of our segments. Our successful acquisition of metal fab and the increase in our revolving credit line from $475 million to $625 million, resulting in record availability for <unk>.
<unk> investments in acquisitions and organic growth opportunities.
Please keep in mind that the inclusion of metal fab in our first quarter 2023 results will make year over year comparisons more difficult.
Metal Fab, which is included in our carbon segment does not report ton sold and typically has higher returns than our distribution business. Additionally, there are several one time acquisition related adjustments that we highlighted in our adjusted EBITDA reconciliation.
For the quarter net income totaled $9 $8 million compared with $37 $3 million in the first quarter of 2022, no LIFO adjustment was recorded for the first quarters of 2023 or 2022.
Adjusted EBITDA was $28 6 million for the first quarter.
Adjusted EBITDA excludes a onetime $2 $1 million GAAP fair market value adjustment to metal Fabs inventory and $2 6 million of acquisition related expenses.
We expect that our reported financial results will begin reflecting the full strength of metal fabs, earning power in the second quarter of 2023 as the acquisition related charges will be behind us and we expect to begin realizing metal supply synergies in the second half of 2023.
Our total debt at the end of the first quarter was $258 million, an increase of $93 million since year end 2022, which included the $131 million acquisition of metal fab.
During the quarter, we generated $52 million of cash from operations, resulting in a $38 million reduction in debt during the quarter.
We expect additional debt reduction during 2023, primarily occurring in the second half of the year.
At quarter end, our credit availability was a record $355 million, providing us with significant capital to continue our strategic investments and acquisitions, new capacity and automation to drive increased efficiency.
Consolidated operating expenses, including metal fab totaled $102 $7 million in the first quarter, an increase of $14 6 million or 16, 6% from the prior year quarter.
The higher expense level reflects the additional metal fabs operating expenses, the onetime acquisition related charges and the absence of a $2 $1 million gain on the sale of our Mylan, Iowa warehouse that occurred in the first quarter of 2022.
Capital expenditures for the first quarter of 2023 totaled $7 4 million compared with depreciation of $5 $1 million we.
We expect 2023 capital expenditures to total $30 million.
Our effective tax rate for the first quarter of 2023 was 26, 8% compared to 27.0% in the first quarter of 2022.
Also during the quarter, we paid the higher cash dividend of $12 five per share a 39% increase from our previous quarterly dividend of <unk> <unk> per share.
Our board of directors approved a 12 five cent per share dividend payable on June 15th to holders as of June <unk>.
Subject to board approval, we expect to maintain the quarterly dividend of $12.05 on a regular basis, we have now paid dividends for 72 consecutive quarters.
Looking forward, we are excited that our reported financial results in the second quarter and beyond will begin to reflect the full strength of metal fabs, earning power the.
The impact from metal fab, along with the continued success of our strategic investments in diversification and organic growth gives us great confidence in the future of Olympic steel.
Now operator, let's open the call for questions.
Thank you we will now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue you.
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One moment, please while we poll for questions. Thank you.
Thank you and our first question is from the line of Samuel Mckinney with Keybanc capital markets. Please proceed with your question.
Hi, good morning.
Good morning, Sam.
Although HRC pricing has slowed in recent weeks it had a significant run in the recent months before that I know you have a heavy contract book it tends to lag spot price right. So what are your expectations for pricing for carbon in the second quarter. After it was basically flat sequentially in the first quarter.
Yes, it's a great question Sam so.
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We expect as <unk> seen certainly in the past few weeks <unk> seen index pricing come off a little bit <unk> seen futures come off certainly more than the index price.
We think that we'll see a little softness as we come through the second quarter.
But as you said there is a lag so we anticipate that margins will hold.
Through the second quarter, and then we'll see where where pricing goes from there.
Okay. Thank you and then in specialty metals volumes were up slightly and pricing was down slightly sequentially. You mentioned the stainless dynamic earlier in the call, but if you could walk us more through those specialty metals dynamics during the first quarter and just directionally, what youre expecting from shipments and volumes in the second quarter.
Yes, it will.
Expectation a couple of things Samsung first.
Inventory levels at the service centers were relatively high coming into the first quarter we.
We've seen.
A reduction as you take a look at the MSCI Mar report you've seen our inventory on hand come down from about four months down to about three months.
We anticipate that that will drop over the course of the next month, probably another month lead times.
From the stainless mills are pretty.
Pretty steady right now and imports are certainly going to play a bigger role as we come into the second half.
Our major customers from the <unk> from the.
Our food equipment side of it have started to pick up so we think that volume will be a little bit better.
Coming into the second quarter truck trailer, which is another big part of what we're doing.
<unk> improved and our automotive business that.
We participate in has been very steady and we've seen a little uptick there as well. So I would think that second quarter will look a little bit better than the first quarter and would anticipate certainly on the inventory levels that everybody will be much more in line as we come through the second quarter.
Okay. Thank you and then lastly for me the release last night, you mentioned that you expect to see the full effect of metal fab earnings in the second quarter and synergies in the second half is there any way to frame up the sort of impact you expect that to have your overall numbers and we should we just expect it to track the historical earnings that you've provided in March.
Sam It's Richie I think using the historical financials from the 8-K that was filed in March is a good starting point I think the two biggest things that you won't see in the second quarter are the two onetime charges that we identified in the earnings release. So you won't have that $2 $1 million write up of the inventory that <unk>.
It resulted in higher cost of goods sold and you won't have that $2 $6 million.
Deal related expenses and just to be clear the $2 1 million affected the carbon segment, the $2 6 million affected the Zeus cost center. So I think I think as we said in the comments second quarter is going to look a lot like the first quarter Youre, just not going to have those onetime charges.
And then I think Sam in the back half of the year, We commented a couple of times.
We're pretty excited about some of the synergies we bring.
On the carbon supply side.
And.
We think by.
Beginning of third quarter, we're going to start to see those so.
That'll be a little power boost in the back half.
In terms of metal faster performance.
Okay. That's it for me thanks, guys. Good luck.
In Q.
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Our next question is from the line of Dave storms with Stonegate capital. Please proceed with your question.
Morning.
Morning, Dave.
First one quick one just with the Iowa groundbreaking in May because thats, an expansion there won't be any downtime associated with that correct.
That's correct that is just purely expansion 30000 additional square feet.
And we would expect to see that effect more in 2024, it should be operational by year end, but it would probably have more of an effect in 2024, and 2023, alright, but no no. We don't anticipate any disruption in the back half while we.
While we construct and expand the building.
Perfect. Okay. Thank you.
And then just on kind of the per tonnage cost for warehousing and distribution that number just kind of seems to keep on climbing is there any green shoots on our pre there or is this the new normal that we we live in.
David's rich so really that is kind of the effect of the businesses. We've acquired in recent years don't report tons sold theyre more on the manufacturing side and so what happens. If you are using the same denominator of tons youre going to have a higher operating expense number that you are dividing those tons into and so it looks like it's rising.
So as we pointed out in the comments we were up.
Roughly I can't remember the exact number I think it was about $14 million of expenses first quarter of 2023 versus first quarter of 2022, that's accounted for and metal fab. The $2 6 million of deal related expenses and then the absence of that $2 $1 million gain on the sale of the Mylan I will warehouse that occurred in <unk>.
2022, which reduced operating expenses those are the three items that explain the entire increase in the operating expenses and so.
We're comfortable where the operating expenses are we're actually seeing inflation kind of come down quarter over quarter as we've seen through the last nine months or so.
I think that's the issue is that you are comparing higher operating expenses that reflect manufacturing businesses that don't reflect tons sold.
That's very helpful. Thank you and then one more for me if I could.
You mentioned kind of an industry wide issue levels coming down just curious as to how you think about industry wide capacity going forward and how you see that changing through the rest of 2023 and maybe even into 2024.
Well, if you take a look at it from two sides. So from a mill capacity, we see more product coming online in the carbon side second half of the year some of the mills that have been.
A little behind in getting up and going seem to be in much better shape. Today. So we will anticipate that there'll be more product available in the second half of the year on the stainless and aluminum side domestic mills, performing really well youll see.
Certainly some some imports.
And the same thing on the aluminum mills aluminum mills are are producing very well and we will see a little bit more on the import side of it from the service centers and from the customers.
To see pretty much the way that it is now with the customers on the supply chain issues that that we've seen it's probably more labor today than raw material, but labor is certainly an issue and the industrial Oems are having challenges trying to eat into their backlogs.
That's very helpful. Thank you.
Thank you.
A reminder to ask a question you May press Star one.
Question is from the line of Chris Sakai with singular research. Please proceed with your question.
Hi, good morning.
Good morning, Good morning, Chris.
Hello.
Can you.
In light on.
The margin expansion and tube <unk> pipe.
What drove that.
Yes, Chris Great question and.
Our pipe and tube business.
And we've been commenting on this for several quarters, but the.
The investment in more fabrication type value add assets.
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Really starting to yield the results that youre seeing in the gross margin so.
It's really the result of a very intentional strategy over the last several years to continue to expand.
The value add equipment.
Also I might add our stainless.
A portion of the pipe and tube business is growing.
And it tends to have a little bit of a higher return so those would be the two primary reasons.
Okay great.
Can you comment on <unk>.
On your appetite for more acquisitions off through the metal fab acquisition.
Yeah, Yeah. Thanks, Chris.
Certainly.
We continue to look at acquisitions as one of the pillars of our growth strategy.
I think as rich mentioned in the prepared remarks, and I did as well.
The good news is even after the metal Fab acquisition. We are now at record availability have an exceptionally strong balance sheet. So we've got plenty of capacity.
To do that we continue to look at strategic acquisitions.
It's just part of.
What we do strategically in everyday in our operations right now so you should expect us to continue.
On the path that we've been over the last five years going forward on acquisitions, obviously metal fab was a big one.
So we're.
We're very focused on the integration aspects of metal fab, which by the way is going tremendously.
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Really after three or four months, it's been a very very smooth transition.
But acquisitions are going to continue to be a.
A growth driver for us together with.
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Organic growth as you've seen in some of the projects that Andrew highlighted earlier.
Okay. Thanks.
Youre welcome.
Thank you at this time, we've reached the end of our question and answer session and I will turn the floor back to Rick <unk> for closing remarks.
Well, thank you very much and thanks for joining us on our call. This morning.
We certainly appreciate your continued interest in Olympic steel.
We will be participating in the Siddhartha <unk> company Microcap virtual conference and Thats on May 11th the.
The Keybank Industrials conference in Boston on May 31, and the Keybanc Steel Roundtable series in New York City in late June .
To conclude I just want to thank the Olympic team for a great start to 2023, we're really excited about our future and we look forward to talking with all of you again soon thank you and have a great day.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.